As merger & acquisition professionals, we know that much of our job is education. The work we do day-in and day-out is a little bit complicated, a little bit obscure, and a whole lot different than a business owner’s day-in and day-out work. We value and enjoy our role as educators but sometimes we get frustrated when our clients get tunnel vision and choose to focus on any problem but the one that matters. We find ourselves having the wrong conversation over and over.
Whether a buyer or seller, there are things our clients bump into that keep them from having a realistic expectation for business value. Below are five things that cause a misconception in what a business is worth. Avoid these and you’re that much closer to an accurate understanding of business value.
1. Listening to the blowhard at the country club
This guy is going to say that he got way more money for his company than he actually did. He tells stories about the process that are exaggerated or simply made up. The blowhard will tell you what you want to hear to get you excited and puff himself up. In the end, this only hurts you because those unrealistic expectations will always be followed by disappointment.
2. Letting “heroes” talk you out of it
The hero will say that no amount of money is enough so you just shouldn’t do anything. Or she might say those people will just screw you over so don’t trust anything they say. The hero is incredibly risk averse and desires to be the voice of reason. She likely doesn’t understand what you are truly trying to accomplish and is forcing her experiences into your goals. Don’t let her talk you out of a fair deal.
3. Overemphasizing the multiple
Please, please, please don’t get obsessed with the multiple. Sure, it matters but when you won’t even consider a certain structure or purchase price because the multiple is wrong we’re in a spot where we likely won’t get a deal done. Be creative, have a little fun with it. Don’t let the multiple be the only way you’ll define success in the transaction.
4. Not getting educated about working capital
Working capital is a company’s available operating liquidity – current assets minus current liabilities. Pretty simple. But nobody really knows how to talk about it in the context of a transaction. It’s important to understand the role it plays. Articles like this or this can get you started. Working capital is especially important in things like construction and sophisticated manufacturing projects where your work in progress is very significant.
5. Ignoring culture
Culture truly matters. Always be interested in the people – who they are, how they work and how they interact with each other. The premium you pay for a business is related to the company’s culture. That is especially true if you define culture as what people do when you’re not there to tell them what to do.
Knowing the exact value of a business is tough. You can get a whole lot closer when you are willing to consider a fair price (not one skewed by other people’s tales), have a reasonable definition of success (not an obsession with the multiple), and focus on the right items during due diligence (remembering things like working capital and culture).